Credit Cards Get their Comeuppance
When I was a kid, I watched adults pay for stuff with credit cards and my tiny, undeveloped brain just couldn’t get around how this worked. Swiping plastic in exchange for lunch or a new jacket? It was right up there with Santa Clause coming down the chimney—there was something fishy about it.
Since I was so confused that a piece of plastic could be used to pay for something instead of cash, I asked my dad, sometimes used his card.
Me: Dad, how do credit cards work?
Dad: Well, there are companies that will give you credit if you promise to pay them back later.
Me: But why would they do that?
Dad: Well, in exchange for “lending” you money like that, they’ll charge you a little bit of interest.
Me: But if you’re paying interest, then why would you want to use a credit card? Why not just pay with cash? Or a check?
Dad: Well, there are some people that want to buy things but they don’t have the money right away. So they use a credit card.
Me: Why don’t they just wait until they have the money?
Dad: It’s past your bed time son, go brush your teeth.
Well, I’ve grown up and—while I have a better understanding of credit cards—I still don’t “get it.” As someone who was raised in a very frugal and sensible environment, paying more for something instead of waiting and paying the actual price is ludicrous.
I got to thinking about this after reading James Surowiecki’s (always) excellent article in the New Yorker: House of Cards. He discusses the different types of customers credit-card companies want and what their ideal customer is like: someone that will get into debt, only pay the minimum every month, but never go bust.
It’s a delicate balance, one that is getting shot to hell in the current climate. Credit-card companies are trying to deleverage—as are customers—and that is going to negatively affect the economy. That’s a good thing for both sides, it’s just not going to be pretty.
On top of that, current customers that are locked in with heavy credit-card debt are at the mercy of the credit-card companies—they can jack up their interest rates whenever they want. Surowiecki puts it as so: “Effectively, they’re captive customers.”
Here’s the thing: we did it to ourselves. I look back at the past few years of crazy spending and the massive amount of credit-card offers we all got and I remember having that feeling again that kept me so confused about Santa and credit cards when I was a kid.
How did we let this happen? No rational being could expect that to go on like that.
And here we are.
The New Yorker article closes out perfectly:
The end of the credit-card boom isn’t going to wreak as much havoc as the end of the housing boom. But it is helping to put a brake on our spending. And, at this point, every little bit hurts.
Amen.
Photo by Andres Rueda
March 19th, 2009 at 7:31 am
Ah, but if you’re one of those people who pays off their credit card every month, the credit card is a good way to get free stuff through a points system.
They do have their advantages.
March 19th, 2009 at 5:20 pm
Brad: I totally agree—I’m one of those people that use their cards for everything to get the cash back. I actually get a little worked up when people blame their cc debt on the cards instead of themselves, but in the post I was kind of speaking in general terms.
Since most people don’t know or can’t properly use credit cards to their advantage.
March 19th, 2009 at 7:21 pm
I’ll third you and Brad’s enthusiasm for credit cards when used properly (that is, paid off every month in full and only used to build rewards). I can’t understand the motivation to buy immediately and then end up paying more, either. Although, if everyone acted rationally with their money, entire industries would crumble, starting with gambling and pawn shops and continuing on to non-reward credit cards, eventually leading most cards to cancel their rewards. (If they’re only making transaction fees and not getting any interest payments from the customers, how many rewards can they actually pay out?) Until then, we can at least take some solace in benefiting from programs designed to get people to make bad money choices.